ESIC - India Payroll

Employee State Insurance Corporation (ESIC) is the social security scheme in India which provides coverage for medical, accident, disability, maternity and death of employees while in employment.

Employee and Employer contribution in ESIC

Currently the ESIC contribution is
1. Employee Contribution 0.75% of monthly wages rounded up to next higher rupee
2. Employer Contribution 3.25% monthly wages rounded up to next higher rupee

For newly implemented areas, the contribution rate for first 24 months (w.e.f. 06.10.2016) are
1. Employee Contribution 1.00% of monthly wages rounded up to next higher rupee
2. Employer Contribution 3.00% of monthly wages rounded up to next higher rupee

Month for ESIC Registration you can set in Payroll Setup.

Setting up ESIC

1. Go to Setup > Payroll Setup > Company Setup
2. If there are multiple companies select the company name else you can directly update the ESI parameter as shown below

Calculation of Monthly Wages for ESI Deduction

To calculate monthly wages the system will use the heads selected in Deduction and Encashment table. If there is payment of salary arrears whether ESI will be deducted on it or not will depend upon the setup parameter as shown in the image above. The following calculations will explain this scenario better.

Sample calculations for including arrears

Suppose salary is modified from back date of 1-Apr-2025 in the month of November-2025.

Revised Basic	Earlier Basic	Basic Arrears	Revised Special Pay	Earlier Special Pay	Special Pay Arrears
15000	12000	21000	5000	10000	-35000

Total Wages (with arrears) = 4000

If total wages becomes negative then it will be rounded up to zero.

If there is Add Back then it will be added to Total Wages after they are rounded up to zero.

Revised Definition of Wages

As per the new Wage definition under section 2(88) of the Code on Social Security 2020 which has come into effect from 21st November 2025. The following are included in the definition of Wages

- Basic

- DA

- Retaining Allowances

The following are excluded from Wages but only up to a limit

- House Rent Allowance (HRA)

- Conveyance allowance or the value of any traveling concession

- Overtime allowance

- Any commission, bonus payable under any law forming part of the employment terms. 

- Employer's bonus payable under pension law

- Provident fund, Gratuity payable by the employer. 

- Contribution to any fund, light, water, medical attendance or other amenities. 

- Value of house accommodation, light, water payable on employment or other amenities/services & any sum paid to the employee for special expenses incurred due to the nature of employment.

If allowances exceed 50% of the Total Remuneration received by the employee then the excess amount should be added back to Wages and deduction should be done on the revised Wages. Please note that the addition of Add Back to Wages will not impact the eligibility or ineligibility of employee for ESI. Only if the Wages as defined in using the heads selected in EazeWork exceeds 21,000 at the end of six month period (March and September) will the employee be removed from ESIC.

Steps for calculating Add Back

Step 1 - for employees who are included in ESI while running payroll "Total Remuneration" for the month is calculated on the basis of the actual amount being paid to the employee. The following heads are excluded from Total Remuneration calculation
- Statutory Bonus
- Employer contribution to EPF, ESI, LWF

Step 2 - Check if the ESI Wages as per selected heads in Deduction and Encashment table are less than 50% of Total Remuneration. If they are then calculate "Add Back = 0.5xTotal Remuneration - ESI Wages"

Step 3 - Calculate "Wages = Wages (as per heads selected in deduction and encashment table) + Add Back". Use this figure for calculation of ESI deductions and preparation of ESIC challans.

Eligibility for participation in ESIC

As per revised norms employees with monthly wages of upto INR 21,000 are eligible to participate in ESI. ESI participation eligibility is always checked at the end of September or March payroll and if employee's salary is crossing the threshold value system would exclude them from ESIC. If an employee's salary has been reduced from a value which was higher to below INR 21,000 then system will show his name in inclusion list when payroll for October or April is being run. The calculation of threshold value of INR 21,000 is always done on the basis of the Salary Structure values and not from the actual payout being made in September or March because the actual payout might be higher or lower due to arrears or leave without pay or leave encasement. The calculation also does not take into account Add Back figure calculated in the last month's payroll.

Payout of Maternity Benefits to Employees Covered in ESIC

As per law if an employee is covered in ESIC and is goes on a Maternity leave then the wages are covered / paid by the ESI Corporation. EazeWork HRMS has this feature available and to use this the Maternity leave feature in Leave module should be first activated. Refer article on Maternity Leave Setup for more details.

When payroll is run system will check the number of days of Maternity / Commissioning or Adoption leave an employee who is covered in ESI has taken and will reduce it from the payout. For the purpose of calculating the payout system will
1. Not stop payment of Adhoc or Variable heads but any head with Fixed or % of Gross attribute would not be paid. Refer to the article on Components of Salary Structure for more details
2. The deduction will be done keeping the total number of days in the month as the basis

Example -
Basic Salary = 15000
No of days employee is on Maternity Leave in April  = 20
Basic paid to employee in payroll would be = 15000 x 10 / 30 (assuming no other leave without pay deduction                                                                                       

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